The U.S. equity markets hit a stumbling block in September, as economic concerns finally overwhelmed the artificial intelligence (AI)-driven euphoria that sparked a historic first-half rally. Now, analysts are predicting the U.S. economy might remain sluggish as inflation remains elevated, resulting in lower consumer demand.
In an interview with Fox Business last week, Jeffrey Gundlach warned, “I think the economy is going to hit a wall in the next six or eight months or so, and there's going to be a real shutdown in consumer activity due to all of these interest payments that have to be made.”
Gundlach, the CEO of DoubleLine Capital, emphasized that while the quantitative easing and stimulus measures undertaken amid the COVID-19 pandemic helped support the economy, it drove asset prices higher, resulting in steep inflation.
To combat inflation, the Federal Reserve has hiked interest rates at an accelerated pace in the last 18 months, resulting in sharply higher mortgage rates. Moreover, U.S. credit card debt surpassed $1 trillion in Q2 of 2023, while total consumer debt is much higher at a whopping $17 trillion.
So, where should you invest amid a recessionary environment? It makes sense to allocate a portion of your capital towards non-cyclical, recession-resistant sectors such as consumer staples. Typically, companies in this sector tend to experience relatively steady demand that allow them to generate stable cash flows across economic cycles, providing a buffer against periods of volatility in broader markets.
For investors seeking recession-friendly stock picks, here are three top ideas to consider.
Colgate-Palmolive
One of the largest consumer staples companies in the world, Colgate-Palmolive (CL) is valued at a market cap of $58.95 billion. It manufactures and distributes a wide portfolio of consumer products globally.
Colgate-Palmolive pays shareholders an annual dividend of $1.90 per share, indicating a yield of 2.66%. These payouts have increased for 60 consecutive years, making the company part of a very exclusive list called Dividend Kings. In the last 20 years, Colgate-Palmolive has raised dividends by 7.2% annually, showcasing the resiliency of its business model.
Out of the 14 analysts tracking CL, seven recommend “strong buy,” one recommends “moderate buy,” and six recommend “hold.” The average target price for CL is $86.61, which is 21.8% above Friday's close.
Kroger
Valued at a market cap of $32.43 billion, Kroger (KR) is the second largest grocer in the U.S. Its big-ticket acquisition of Albertsons (ACI) should help Kroger double its store count to 4,500 locations, resulting in higher earnings and cash flows once the combined entity benefits from cost synergies. In fact, Kroger’s management expects cost synergies of $1 billion in the first four years post-acquisition.
Additionally, Kroger is experiencing stellar demand in its higher-margin verticals - such as precision marketing, rewards and gift cards, ventures, and real estate - which brought in $1.2 billion in operating profits last year.
Priced at less than 10 times forward earnings, Kroger is forecast to increase its bottom line at an annual rate of 8% in the next five years. It also offers shareholders a dividend yield of 2.37%.
Out of the 14 analysts tracking KR, seven recommend “strong buy,” and seven recommend “hold.” The average target price for Kroger stock is $52.60, which is 17.5% above current levels.
Sysco
The final stock on my list is Sysco (SYY), which operates in the food distribution space. Down about 25% from its all-time highs, SYY currently offers investors a tasty dividend yield of 2.96%. Moreover, these payouts have risen by 9.6% annually in the last 25 years.
Sysco stock is currently priced at 15x forward earnings, which is not too steep, given its forecast to increase earnings by 12.5% annually in the next five years. Despite a higher cost base, Sysco has increased its free cash flow from $1.15 billion in 2021 to $2 billion in 2022.
Out of the 12 analysts covering SYY, nine recommend “strong buy,” and three recommend “hold.” The stock trades at a discount of 24.5% to its consensus price target of $87.50.
